ROI, Rl, DuPont method, investment decisions, balanced scorecard. News Report Group has two major divisions: Print and Internet. Summary financial data (in millions) for 2016 and 2017 are as follows:
The two division managers’ annual bonuses are based on division ROI (defined as operating income divided by total assets). If a division reports an increase in ROI from the previous year, its management is automatically eligible for a bonus; however, the management of a division reporting a decline in ROI has to present an explanation to the News Report Group board and is unlikely to get any bonus. Carol Mays, manager of the Print division, is considering a proposal to invest $2,580 million in a new computerized news reporting and printing system. It is estimated that the new system’s state-of-the-art graphics and ability to quickly incorporate late-breaking news into papers will increase 2018 division operating income by $360 million. News Report Group uses a 10% required rate of
- 1. Use the DuPont method of profitability analysis to explain differences in 2017 ROIs between the two divisions. Use 2017 total assets as the investment base.
- 2. Why might Mays be less than enthusiastic about accepting the investment proposal for the new system despite her belief in the benefits of the new technology?
- 3. John Mendenhall, CEO of News Report Group, is considering a proposal to base division executive compensation on division RI.
- a. Compute the 2017 RI of each division.
- b. Would adoption of an RI measure reduce Mays’s reluctance to adopt the new computerized system investment proposal?
- 4. Mendenhall is concerned that the focus on annual ROI could have an adverse long-run effect on News Report Group’s customers. What other measurements, if any, do you recommend that Mendenhall use? Explain briefly.
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- The following revenue data were taken from the December 31, 2017, General Electric annual report (10-K): For each segment and each year, calculate intersegment sales (another name for transfer sales) as a percentage of total sales. Using Microsoft Excel or another spreadsheet application, create a clustered column graph to show the 2016 and 2017 percentages for each division. Comment on your observations of this data. How might a division sales manager use this data?arrow_forwardBillings Company is a decentralized wholesaler with five autonomous divisions. The divisions are evaluated on the basis of with year-end bonuses given to the divisional managers who have the highest ROIs. Operating results for the company's Office Products Division for this year are given below: Sales $22,505,000 Variable expenses 14,105,500 Contribution margin 8,399,500 Fixed expenses 6,145,000 Net operating income $2,254,500 Divisional average operating assets $4,687,500. The company had an overall return on investment () of 17.00% this year (considering all divisions). Next year the Office Products Division has an opportunity to add a new product line that would require an additional investment that would increase average operating assets by $3,261,000. The cost and revenue characteristics of the new product line per year would be: Sales $9,750,000 Variable expenses 65% of sales Fixed expenses $2,595,300. Required: Compute the Office Products Division's ROI for this year 2. Compute…arrow_forwardExercise 25.4 (Algo) ROI versus EVA Measures (LO25-2, LO25-3, LO25-4) Bailey uses ROI to measure the performance of its operating divisions and to reward its division managers. A summary of the annual eports from two of Bailey's divisions is shown provided below. The company's weighted-average cost of capital is 11 percent. Division A Division B $6,220,000 $4 650,000 $ 1,060,000 $ 8,530,000 $ 1,850,000 $ 1,182,100 Total assets Current liabilities After-tax operating income ROI 21% 13% a. Based on ROI, Division A generates more profit per dollar of invested capital than Division B. Compute the EVA for Division A and Division B. c. Suppose the manager of Division A was offered a one-year project that would increase her investment base by $340,000 and increase her divisional operating income by $34,000. Would she be motivated to invest in this project? Comple this question by entering your answers in the tabs below. Required A Required B Based on ROI, Division A generates more profit per…arrow_forward
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